By the end of COP26, over 200 countries had announced decarbonisation commitments and plans, along with a range of pledges around funding clean technology, decreasing reliance on petrochemicals, phasing out fuel subsidies and stopping deforestation. Alongside governmental action, the onus is now on companies to transform their business models and operations if Net Zero targets are to be met.
The automotive industry clearly has a major role to play in helping countries to achieve Net Zero. Petrol-engined and diesel-fuelled vehicles remain a significant source of emissions – yet while a number of governments have already put laws into place to phase out their sale, these will only work if the industry produces and promotes a sufficient quantity of electric alternatives, and continues to invest and innovate in areas such as hydrogen fuel cells.
This is clearly a major transition, and the infrastructure to support is still coming into being. But as with other industries, automotive has to balance the development of greener products and services with the imperative to grow its business. While shareholders, stakeholders, and regulators will be carefully watching to ensure real progress against Net Zero commitments, those very same shareholders will still be expecting companies to continue to deliver growth during this process.
So how can companies balance these two potentially conflicting ambitions?
Arthur D Little (ADL) has conducted research into the performance of companies which shows that delivering growth while reducing emissions is certainly achievable. We looked at the performance of selected listed companies from asset-intensive sectors by comparing revenue growth and emissions reduction rates for the same duration.
Our analysis shows that many companies have grown revenue while reducing emissions by at least 3% compound annual growth rate (CAGR). What stood out with these “sustainable growers” was that they took the issue of emissions reduction seriously, making it a core part of their corporate objectives, and investing in key technologies and innovations. They used their existing capabilities, such as scale and ability to manage large capital-intensive projects, to diversify successfully.
But the majority of companies didn’t fare so well. Some companies pursuing organic growth have lost sight of the emissions implications of increasing production and sales of their products without allocating sufficient capex to sustainable projects to balance them out. Others have simply sold off “bad assets”, leading to emissions reduction (for them), but lower growth.
To achieve the dual objectives of growth and emissions reduction in asset-intensive sectors requires corporate leaders to focus on four key areas.
Companies will not succeed unless there is ongoing, widespread demand for their new products. The key question for automotive is how quickly customers will change their buying behaviour in favour of greener vehicles. Legislation is expected to play a role in driving consumer demand, but rather than wait until regulations are in place, companies should work swiftly to educate their customers and influence their mindsets, and to collaborate directly with them to generate demand early on.
With low-carbon/negative-carbon technologies now at various stages of maturity and development, companies need to explore, understand, and assess them for future growth and value creation potential. Low-carbon electric vehicle technologies are clearly at the heart of the automotive industry’s future, but there are still significant value and sustainability gains to be made through the increased digitalisation of companies’ business and manufacturing operations.
In the Net Zero world, new business models will open up new growth opportunities. For instance, by moving from supplying hardware to providing services, automotive companies can create new business models across areas such as mobility, smart cities, and logistics. In addition, CEOs will need to get used to running “two speed companies” – one that is tied to the core/legacy business, and one that is much more agile, constantly innovating and bringing out new-generation products and services.
Achieving success starts by aligning priorities across the board, management and employees. The CEO and senior management need to work hard to communicate and increase awareness of Net Zero objectives across the organisation to boost engagement. Companies then need to think through and act to set the type and time horizon of incentives and ensure that all employee objectives fit with company Net Zero aims.
Ultimately, Net Zero must be completely integrated into the automotive industry’s strategic planning going forward, as well as being built into each individual company’s overall revenue model. Emissions reduction and financial growth is possible, but it requires vision, commitment and bravery to achieve these dual objectives.
Dr Hasan Shafi is a partner in Arthur D Little’s Dubai office. He is a core member of the Energy & Utilities (ENUT) and Chemicals practices
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